Over the past couple of winters the annual “battle to buy acres” between corn and soybeans looked more like a race to the bottom -- to see who would surrender first.
But after several years of figuring which crop would lose the least, farmers penciling out plans for the coming spring finally have a real choice over what to plant.
While economics, weather, and probably some politics, will sway what goes into the ground in 2021, the futures market has chosen a winner. The ratio of November 2021 soybean to December 2021 corn futures closed Monday above 2.57 to 1. That’s clearly in favor of soybeans.
USDA also gave soybeans some love. The agency’s updated long-range projections predicted farmers would plant 89 million acres of soybeans in 2021, just 1 million less than corn. And that forecast was made on early October data, when the soybean-to-corn ratio was around 2.45 to 1.
Based on Monday’s futures close, soybeans currently show a projected profit of around $37.50 per acre compared to the full economic cost of production forecast by USDA. Corn pencils in a loss of around $31 an acre, though most growers could cash flow the crop because the government’s cost for machinery tends to be much higher than figures used by economists out in the field.
Obviously, with farmers still winding up the 2020 harvest, a lot could change. Here are a couple of the major variables in play.
How many soybeans will be left over at the end of the 2020 marketing year Aug. 31?
Old crop ending stocks are the starting point for the 2021 supply and demand balance sheet. USDA triggered another leg higher on the board Nov. 10, projecting carryout would drop to just 190 million bushels. Almost all of USDA’s reduction came from a smaller estimate of 2020 U.S. production. But there are plenty of questions about demand too.
According to data out Monday, Members of the National Oilseed Processors Association crushed 185.3 million bushels in October, the most for any month ever. Crush margins jumped on the soybean rally; they’ve come down a bit but still remain attractive. The total for the first two months of the marketing year is up 5.7% from 2019-2020 levels. USDA currently projects less than a 1% increase.
Exports are even more of a question mark. USDA pegs U.S. exports for 2020-2021 at 2.2 billion bushels, a record. Even after discounting some of the torrid pace of early sales and shipments, USDA could be 50 million bushels too low on its outlook due to robust demand from China, one of the few countries in the world expected to show positive economic growth for 2020 despite the COVID-19 pandemic.
Moreover, USDA’s current forecasts assume Brazil harvests a record 4.9 billion bushels in coming months. That’s looking less and less likely. Vegetation Health Index levels in the key state of Mato Grosso remain at less than 50% of average. Rains over the next week are expected to help only the northern half of the country’s growing region, with dry weather returning in the second week of the outlook. If Brazil’s crop is only 3% smaller than USDA forecasts, U.S. exports could be strong enough to push 2020-2021 carryout below 100 million bushels.
Could corn be the “sleeper?”
Brazilian weather could be a wild card in the corn market too. Much of the crop there is planted behind soybeans. Late soybean planting could push corn growth further into the country’s dry season and perhaps curtail acreage too. But that question won’t be resolved until mid-2021.
Still, thanks to record imports by China, USDA forecasts U.S. corn exports will hit 2.65 billion bu. during the 2020 crop marketing year. That’s far from a done deal, but if it’s too optimistic it may not spell doom for 2021 crop corn prices.
My projections show global feed gain supplies tightening for a fifth straight year. That should help support U.S. prices even if stocks here edge higher during the 2021 marketing year. My models put average cash soybean prices at $9.95 for the 2021 crop, with corn at $4.25. That translates into a price ratio of around 2.34 to 1, close to the long-term average. Under that scenario planting corn would net $20 more than soybeans, assuming normal yields.
What will La Nina do?
The dry pattern noted from Argentina into Brazil appears to be in part connected to development of La Nina cooling of the equatorial Pacific. This event appears to be gathering momentum, and some models suggest it will become a strong event, with a 65% chance of lasting through spring. Some U.S. droughts are associated with La Nina. And even though the cycle is expected to return to neutral by summer, the effects of the pattern could linger enough to create potential for weather scares during the summer of 2021.
The uncertainty over supply and demand is one reason why I favor focusing on marketing 2020 crop inventory rather than aggressively pricing expected 2021 production. Current 2021 crop futures provide a return over costs of around 8% for soybeans, and -4% for corn. My studies suggest forward pricing crops a year out should be done very cautiously unless you can lock in much better margins.